CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

The German subsidiary of the U.S. firm Max. Co. has the following balance sheet information for its first year of operation (German Marks):

Cash: 100.
Inventory: 450.
Fixed assets (net): 780.
Total: 1,330.
Accounts payable: 120.
Common stock: 1,000.
Retained earnings: 210.
Total: 1,330.

The U.S. controller will use the all-current method for foreign currency translation, where the translation rate at the beginning of the year was 3.0 marks to the dollar, the average rate 3.5 marks to the dollar, and the year-end rate at 4 marks to the dollar.

The translation of Max's German subsidiary using the all-current method results in a foreign currency translation gain of $35. This is recorded on the books of Max as:

A. An asset of $35.
B. A credit to cumulative translation adjustment of $35, a component of stockholders' equity.
C. An extraordinary gain of $35, net of tax.
Correct Answer: B

User Contributed Comments 3

User Comment
rhardin I can't get that $35. And it doesn't make sense to me that we are recording a gain of $35 when it looks like the foreign currency is depreciating?
akirchner1 No math would be required since all 3 answer choices state a gain so by default you would know that the correct choice is B) ...a component of stockholder's equity.
davidt876 let rhardin think outside the box akir! and from the looks of things, rhardin you're right.

..unless of course the exchange rate dipped unexpectedly back below 3 during the year, and they just so happened to sell a bunch of assets at a profit at that exact moment
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